It’s normal for the CEO of a public company to speak glowingly of its products and prospects in complete contradiction to whatever reality might be showing. Have you ever heard of a company president saying, “Well things don’t look that great for us, and our future isn’t very exciting either.”
The answer is probably ”yes”, but only after they’ve filed for Chapter 11.
CEOs are expected to ‘talk up’ their companies, just as fund managers ‘talk their book’ whenever anybody sticks a microphone or camera in their face.
When Goldman Sachs (NYSE:GS) predicted that oil could rise to $105 a barrel in March of 2005 when it was trading in the $50 – 60 per barrel range, it set a new price record of $71 by the end of August.
The research note said,
We believe oil markets may have entered the early stages of what we have referred to as a ``super spike'' period -- a multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return.
Boy was that an understatement!
Goldman felt compelled to comment again on the price of oil on March 7, 2008 with oil ranging around $100, suggesting that $200 a barrel oil was now conceivable. These were the same analysts who made the 2005 prediction.
Goldman Sachs is not an energy company, but it is very integrated with the energy business as financiers and derivatives contracts purveyors. They are one of the largest-volume over-the-counter contracts writers in the world, and write contracts for those who bet that oil is going to go higher as well as for those who think oil is going to go lower. They’re like ‘the house’ in a casino. They make money no matter which direction it goes.
But large institutions with global reach have learned that they can profit far more grandly and reliably if they can be on the correct side of long or short in their own accounts. Large institutions like Goldman Sachs and J.P. Morgan (NYSE:JPM) have also learned that they can influence market behavior by publishing comments about the direction of commodities prices like oil.
Goldman does not specifically publish information relevant to its profit and loss from energy trading in derivatives, or investments. But during the period inclusive of their original prediction and November 2008, both Goldman Sachs and Morgan Stanley (NYSE:MS) each originated a combined 82% of all energy related derivatives contracts.
Does the fact that Goldman Sachs made bullish statements about the price of oil mean they are guilty of manipulating or influencing market price direction? Absolutely not.
But anyone who is an active trader in anything will recognize a pattern where the sector’s biggest players influence buying and selling by ‘touting’ their wares.
The same tactic is regularly deployed in the gold market.
The public is conditioned to believe that when gold is weak, the economy must be strong, and vice versa. When the fundamentals of the economy in its current state start to undermine the apparent U.S. Dollar strength, statements surrounding the undesirability of gold, its weakness, its absence of return on investment, difficulties with storage and security, not to mention impending sales by central banks and the International Monetary Fund – suddenly festoon the newswires like lights on a Christmas tree. Avid news trackers will note that the announcements of impending sales are seldom followed by reports of the actual sales. If the Gold Anti-trust Action Committee is to be believed, the central banks don’t have as much gold as they say they do.
I spoke to an ex-gold trader who was previously employed by Goldman Sachs’ commodities division J Aron, and he said,
If the government really wanted to shut up GATA and all the credible people working to expose the discrepancy, they would just get one of the big auditing firms to come in and count the gold and that would be it. It’s the government’s own inaction on such a simple and obvious solution that confirms the fact that they’re full of sh_t. Of course, GATA is right.
The most recent example of complicity among the central banks and the largest commercial derivatives traders came last week in the form of a news item by Reuters stating that “JPMorgan hikes 2009, 2010 gold, silver price views.”
It then goes on to say they see gold averaging $960 in 2009, $950 in 2010, and $900 in 2011! How does that constitute a hike? If the bank had any credibility or objectivity whatsoever, how can it look out three years and predict a diminishing gold price in that time frame when we are looking at the worst economic fundamentals across the globe since 1933?
It’s utterly preposterous, yet gold obediently is sold off (or manipulated down) to below $860 within 60 days of nearly breaching its last record of $1026 set just over a year ago. (Were you intending to use an exclamation mark?)
The only saving grace about this pattern for agile investors is that when you know what to look for, you can make a lot of money off of these moves. Volatility is where big money is made (and lost), and once you’ve learned to spot the onslaught of a new disinformation campaign with any degree of reliability you’ll do very well.
It is the recognition of this pattern of Obama’s, Geithner’s, and Bernanke’s statements waxing positive about the state of the U.S. economy and the global banking system that raises eyebrows.
The rally in markets that began on March 10th coincided with the about face in the U.S. government’s position from one of caution and dour warning to one of “cautious optimism”. It culminated with the G20 meeting in London in early April, from which the leaders all emerged visibly assured, parroting identically optimistic themes.
Experienced traders will also bear witness to the fact that promotional language opposed by contradictory performance data will take the air out of a bull’s balloon faster than you can say “Jack the Bear”.
And market data is decidedly at odds with the positivity expressed by the 3 musketeers wielding the U.S. economic swords. Unemployment continues to rise, corporate and personal bankruptcies ditto, and capital velocity is better characterized as capital sluggishness. Economic activity is still in a contractive mode throughout the global economy. The major banks proclaim profitability, but only after accounting rules are adjusted so the definition of “mark-to-market” means something less onerous to their balance sheets. Goldman Sachs says they didn’t really need the $10 billion they borrowed from the government, but nevertheless needed to raise $5 billion to help pay it back. If they didn’t need it, where’d it go?
We can’t blame Mssrs. Obama, Geithner and Bernanke for talking their book. I would bet that they all got a pep talk from their advisors admonishing them for excessive gloominess in the first 60 days of the new regime. They’re obliged by their positions to tout hard, and doom and gloom is no way to sell stock.
But, I would argue that such effusive econo-boosting is irresponsible and dangerous, and ultimately exacerbates the long term economic damage being inflicted by deteriorating fundamentals. Here are all these funds and investors hedging and investing according to a protracted contraction, and the happy talk in Washington sets off a bear market rally that buries portfolios oriented towards the data.
According to a report released by Barclays Capital (NYSE:BCS) Thursday:
The recent market rally that started on March 10th has been dramatic, unexpected, and actually quite painful for the vast majority of quantitative equity managers. Based on our conversations with numerous managers in recent weeks, we believe that most quantitative managers’ portfolios were not positioned in expectation of a rally. Of the nearly 80 managers we have talked to, only one manager said they were up since March 9th and the clear majority admitted to being notably down or stopped out on their positions. These managers were both long-only and long-short quant managers using market neutral and non-market neutral strategies, sector neutral and non-sector neutral strategies, longer term and intermediate term holding periods. It is fair to say that just about everyone is bewildered and trying to understand when this rally will end.
Likewise, consumers who might otherwise be socking away savings and conducting themselves thriftily are encouraged to rush out and rack up the credit cards again, setting the stage for yet more capital destruction down the road.
It is a sad comment on our society that our globalized “free market” economy is, so apparently, a cheap penny stock, complete with hucksters at the top and mindless zombies falling for the hype, hook, line, and sinker, stacked all the way to the bottom.
Instead of a bull or a bear market, I call this a “fish market”. It really stinks.